Profitability comes from the word "rent," and rent, literally, means income. Based on this, profitability is profitability, profitability. In simple terms, this is a situation where revenues exceed expenses. In this case, from an economic point of view, any enterprise that makes a profit can be considered profitable.
Profitability indicators give a characteristic of the enterprise, show how profitable the various areas of its activity. They are more complete than profit give a characterization of the final results of management, since their value shows the ratio of the result (effect) with the resources available and consumed in the production process. They are less than indicators of profit, depend on inflation. Profitability indicators are used to assess the activities of the enterprise, as a tool in investment policy, as well as pricing.
There are several groups of profitability indicators:
- Indicators that characterize the profitability of core and investment activities.
- Indicators of profitability of sales or profitability of turnover.
- Indicators showing how profitable the capital or its individual parts.
Product and Enterprise Profitability
It is calculated both as a whole for the enterprise, and for each type of product. The size of this indicator depends on the quantity and structure of products manufactured by the enterprise.
Product profitability is determined by the ratio of profit to cost.
P = P / C * 100 , (%).
Product profitability shows which products are more profitable for production, that is, which products are worth producing and which are not. The cost of production should be consistent with costs.
Product profitability shows the amount of profit attributable to the ruble of current costs. It means the ratio of profit to the cost of production, sales. She is the rate of profit.
P products = (Price - Cost) / Cost * 100, (%).
Product profitability shows whether production is effective and how, but in general, the overall performance of the enterprise.
Product profitability shows what the result of current costs is.
Profitability of production is calculated by the formula:
P total = Profit / (fixed assets + current assets) * 100, (%).
The level of profitability is calculated by the formula: UR = P / S , where
P- net profit;
C is the cost of sales.
To increase this indicator, it is necessary to increase profits and reduce the cost of production.
For investment projects, the profitability index is calculated:
IR = Profit / amount of Investments.
Return on sales = Profit / amount of Revenue.
Return on equity is measured using return on equity. It is the ratio of profit to value (average annual) of invested capital.
In the process of functioning of the enterprise, there is a process of capital circulation, which is continuous. The structure of funds, the sources of their formation are changing, cash resources and the company's need for financial resources are changing, the financial condition of the company is changing . Its external manifestation is the solvency of the enterprise. The inside is characterized by financial stability, reflecting the balance of income and expenses, funds and, accordingly, the sources of their formation.
In order to increase profitability, an enterprise must necessarily pursue a flexible policy in the field of production and sales of products, focusing on market volatility.